403(b) Plan Correction Options

Last year, the IRS significantly upgraded and expanded the corrective actions retirement plan sponsors are able to submit through the Employee Plans Compliance Resolution System (EPCRS). The most notable change is the ability for sponsors of 403(b) plans to make corrections to certain plan failures. Until this upgrade, only plan sponsors of non-tax-exempt plans (including 401(k) and 457(b) plans) were able to use this quick resolution method. With this change, all plan sponsors will be able to resolve issues using EPCRS with less paperwork, fewer delays and faster turnaround time.

Beyond efficiency, another reason for upgrading EPCRS is to give 403(b) plan sponsors a way to address plan documentation failures. All 403(b) plans were required to submit plan documentation to the IRS no later than December 31, 2009. However, since many had only maintained informal documents on their plan, it was quite difficult to create the required documentation. Unfortunately, this meant that a majority of 403(b) plans were not in compliance with plan regulations. Now, 403(b) plan sponsors can use the Voluntary Correction Program (VCP) to correct plan documentation issues.

403(b) Plan Corrections

Below is a list of common plan corrections that can be completed through the VCP including:

Improper Plan Documentation – If you did not adopt the required written plan document by December 31, 2009, then you are required to do so. According to the IRS the quickest way to address this issue is to put plan operations into a written plan. Now it’s important to be sure that it complies with the final 403(b) regulations. Once the written plan is completed you will need to formally adopt it as part of your plan. Finally, make a submission with the Voluntary Correction Program to resolve the situation.

Missed Opportunity For Salary Deferrals – If you did not give all qualifying plan participants the opportunity to make an elective salary deferral then you need to take corrective action. To remedy the situation you need to provide excluded employees the opportunity to participate in the plan in the current and future years as well as make corrective contributions to the plan that compensates for the missed deferral opportunity. Depending on the significance of the error and the amount of time that has lapsed, a submission with the Voluntary Correction Program may be necessary.

Loan Issues – If your plan did not limit loan amounts or enforce timely repayment then corrective actions need to be taken. Otherwise, the loans can be considered taxable income for the plan participant. Plan sponsors can correct most loan issues by making corrective repayments or modifying the loan terms. It’s important to note that these changes must be implemented along with a submission through the VCP. Changes without the submission will not be sufficient to remedy the issue.

Hardship Distribution Documentation – If the plan does not have proper documentation to permit hardship withdrawals and to ensure hardship withdrawals meet the proper definition and requirements, then corrective action must be taken. To remedy the situation, amend plan documents to retroactively allow for hardship distributions or request repayment of amounts distributed, plus calculated earnings thereon. Depending on the significance of the error and the amount of time that has lapsed, a submission with the Voluntary Correction Program may be necessary.

15 Years of Service Catch Up – If your plan has a participant that has been making the 15 years of service catch up contributions but is not eligible to do so, then corrective actions must be taken. To remedy the situation, refund the excess deferrals plus any related earnings. Be sure to report the income information on IRS Form 1099-R. Depending on the significance of the error and the amount of time that has lapsed, a submission with the Voluntary Correction Program may be necessary.

Contact Us

Making 403(b) plan corrections can be a simple process but it’s important to understand the corrective steps properly. If a plan sponsor performs only a partial correction then the tax-exempt status of the plan may be at risk. For this reason, it’s essential to work with a provider that can provide proper guidance. If your organization has questions about making a plan correction, contact Barnes Dennig today. For additional information please call us at 513-241-8313, or click here for email. We look forward to speaking with you.